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Power to the independent providers: Investing in South Africa’s energy sector

Given South Africa’s heavy reliance on energy-intensive industries such as mining and manufacturing, it should come as no surprise that the country now boasts Africa’s most comprehensive and transparent energy policy.

Ensuring a secure source of power is central to the country’s growth. South Africa currently uses some 40 percent of the total electricity consumed on the continent and – outside of a few peak periods where power is imported from the Democratic Republic of Congo (DRC) – the country is largely self-sufficient in power generation. With steadily climbing economic and demographic growth rates, it is clear that the country will require continuous capacity increases to keep pace with projected growth.

A stable and sustainable plan

It is encouraging, therefore, that South Africa has developed a long-term energy plan that clearly identifies the country’s future needs and articulates a practical and sustainable investment strategy to achieve these goals.

The plan, known as the Integrated Resource Plan for Electricity 2010-2030 (or IRP2010) details the capacity, investment costs, timing requirements and technologies that the country requires to meet anticipated demand over the next two decades. The plan also takes into account other key economic and social considerations such as climate change mitigation, diversity and security of supply, job creation and sustainable development.

Moreover, the plan takes definitive measures to reduce the country’s reliance on coal generation. Between 2010 and 2030, the plan envisions coal’s proportion of generation capacity falling from 90 percent to 65 percent, while renewable energy sources will rise to 9 percent from a virtually non-existent baseline in 2010. Nuclear and gas generating capacity is also set to increase to replace coal.

IPPS for IRP2010

For the most part, IRP2010 places a significant focus on leveraging independent power producers (IPPs) to rapidly increase capacity without the need for Eskom – South Africa’s state-owned utility – to take on new funding obligations. In the first 2 years of the plan, the IRP2010 envisions IPPs making up 10 percent of the country’s generation capacity, increasing to 30 percent by 2030. The energy authority is currently considering a wide range of proposals including renewable energy generation, self-generation and cogeneration as well as more conventional forms of generation such as coal-fired facilities.

Having already conducted two distinct tender rounds led by the Department of Energy, the National Treasury, Eskom and NERSA (the electricity regulator), the country has received a wealth of proposals both from domestic and international players.

Foreign players seeking a foothold into the continent will find South Africa’s legal and regulatory environment well-suited to investment. Beyond having what is arguably the continent’s most transparent and structured energy policy, the plan also includes strong government backing which means that any deals that are struck are essentially highly-bankable for at least 20 years.

A word to the wise: success in the South African power market will largely depend on the ability of international players to partner with local investors and conduct at least part of their procurement within the domestic market. As expected, the government intends to use the energy infrastructure development program to address the country’s socio-economic imperatives – creating investment opportunities for historically disadvantaged citizens, creating local manufacturing capability where possible and maximizing job creation particularly for the local community where a project is based. Understanding the local environment, marketplace and regulatory regime will be key for international players coming into the country.